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Fortnightly Magazine - July 15 1996

associated with generation. Inexpensive generation from the Midwest is of little use to New Englanders. Similarly, inexpensive hydropower from Canada makes little difference. No additional power bought from Canada will make it to Connecticut because of weak transmission capability and the restrictions imposed by requirements to deliver power reliably across the New England grid to Pennsylvania.

A closer look at the availability of inexpensive generation in the eastern United States reveals that significant efficiency gains are possible only when trading power over large distances. The average cost of power in the Northeast is generally much higher than in the Midwest. Many estimates of stranded generation costs factor in these cost differences. The error of these estimates lies in a failure to recognize that power differs from many other commodities in that it has to be available at the right place and at the right time to be useful.

The most important insight derived from recent debate over deregulation is a recognition that coordinated management of available resources is more efficient than distributed decisionmaking. That tips the scales in favor of a "PoolCo" rather than strictly bilateral structures. It comes as no surprise to find that coordinated optimization is more efficient than the results of multiple suboptimizations. Qualitatively, this is how the current power grid operates.

Other problems that impose a much more detrimental effect on system performance have not received equal attention, however. Instead, it is blithely supposed that market forces will sort these out. Monumental changes are taking place as a result.

In an industry in which externalities associated with the primary supply/demand process may impose substantial effects on the efficiency of the interconnected system, the process of achieving dynamic efficiency cannot be left solely to the market. To start with, typical estimates of stranded costs most frequently assume that any generator is useful at any arbitrary location and at any time of use. This notion is a basic fallacy if we seek to make safe, clean, and uninterrupted electricity always available (em and inexpensive too. Reliability, after all, imposes significant costs.

The Economics of Reliability

The accepted industry definition of "uninterrupted" is that in a region like the entire eastern United States, no single equipment outage (e.g., the shutdown of a major transmission line or generating station) will have any effect on customers. Based on an MIT analysis of a similar scenario for a hot New England summer in 1988, the load peaks in New England this summer will necessitate interrupting the supply of electricity to some customers. The situation appears worse now than in 1988 because three nuclear units are off line. These unavailable units are not necessarily "stranded"; they may pay off in a very useful way for situations like this, at least until the area acquires enough new generation to replace them. For now, we must consider how to salvage the situation. We must determine the economics of reliability.

Two qualitatively different solutions are possible: 1) import power, or 2) reduce consumption. The first choice makes more sense. Unfortunately, however, New England cannot import any more power